User:Morganrasco0315/Labour economics

Labour economics seeks to understand the functioning and dynamics of the markets for wage labour. Labour is a commodity that supplied by labourers in exchange for a wage paid by demanding firms.

Labour markets or job markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers) and the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.

Labour is a measure of the work done by human beings. It is conventionally contrasted with such other factors of production as land and capital. Some theories focus on human capital (referring to the skills that workers possess, not necessarily their actual work). Labour is unique to study because it is a special type of good that cannot be separated from the owner (i.e. the work cannot be separated from the person who does it). A labour market is also different from other markets in that workers are the suppliers and firms are the demanders.

The Labour force (LF) is defined as the number of people of working age, who are either employed or actively looking for work (unemployed). The labour force participation rate (LFPR) is the number of people in the labour force divided by the size of the adult civilian non-institutional population (or by the population of working age that is not institutionalized), LFPR = LF/Population.

The non-labour force includes those who are not looking for work, those who are institutionalized (such as in prisons or psychiatric wards), stay-at home spouses, children not of working age, and those serving in the military. The unemployment level is defined as the labour force minus the number of people currently employed. The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age). In these statistics, self-employed people are counted as employed.

The skills required in a labor force can vary from individual to individual, as well as from firm to firm. Some firms have specific skills they are interested in, limiting the labour force to certain criteria. A firm requiring specific skills will help determine the size of the market.

Variables like employment level, unemployment level, labour force, and unfilled vacancies are called stock variables because they measure a quantity at a point in time. They can be contrasted with flow variables which measure a quantity over a duration of time. Changes in the labour force are due to flow variables such as natural population growth, net immigration, new entrants, and retirements. Changes in unemployment depend on inflows (non-employed people starting to look for jobs and employed people who lose their jobs that are looking for new ones) and outflows (people who find new employment and people who stop looking for employment). When looking at the overall macro economy, several types of unemployment have been identified, which can be separated into two categories of natural and unnatural unemployment.

Natural Unemployment


 * Frictional unemployment – This reflects the fact that it takes time for people to find and settle into new jobs that they feel are appropriate for them and their skill set. Technological advancement often reduces frictional unemployment; for example, internet search engines have reduced the cost and time associated with locating employment or personnel selection.
 * Structural unemployment – the number of jobs available in an industry are not sufficient enough to provide jobs to all persons who are interested in working or qualified to work in that industry. This can be due to the changes in industries prevalent in a country or because wages for industry are too high, causing people to want to supply their labour to that industry.
 * Natural rate of unemployment (also known as full employment) – This is the summation of frictional and structural unemployment, that excludes cyclical contributions of unemployment (e.g. recessions) and seasonal unemployment. It is the lowest rate of unemployment that a stable economy can expect to achieve, given that some frictional and structural unemployment is inevitable. Economists do not agree on the level of the natural rate, with estimates ranging from 1% to 5%, or on its meaning – some associate it with "non-accelerating inflation". The estimated rate varies between countries and across time.

Unnatural Unemployment


 * Demand deficient unemployment (also known as cyclical unemployment) – In Keynesian economics, any level of unemployment beyond the natural rate is probably due to insufficient goods demand in the overall economy. During a recession, aggregate expenditure is deficient causing the underutilisation of inputs (including labour). Aggregate expenditure (AE) can be increased, according to Keynes, by increasing consumption spending (C), increasing investment spending (I), increasing government spending (G), or increasing the net of exports minus imports (X−M), since AE = C + I + G + (X−M).
 * Seasonal unemployment -- unemployment due to seasonal fluctuations of demand for workers across industries, such as in the retail industry after holidays that involve a lot of shopping are over.

In many real-life situations the assumption of perfect information is unrealistic. An employer does not necessarily know how hard workers are working or how productive they are. This provides an incentive for workers to shirk from providing their full effort, called moral hazard. Since it is difficult for the employer to identify the hard-working and the shirking employees, there is no incentive to work hard and productivity falls overall, leading to the hiring of more workers and a lower unemployment rate.

One solution that is used to avoid moral hazard is stock options that grant employees the chance to benefit directly from a firm's success. However, this solution has attracted criticism as executives with large stock-option packages have been suspected of acting to over-inflate share values to the detriment of the long-run welfare of the firm. Another solution, foreshadowed by the rise of temporary workers in Japan and the firing of many of these workers in response to the financial crisis of 2008, is more flexible job- contracts and -terms that encourage employees to work less than full-time by partially compensating for the loss of hours, relying on workers to adapt their working time in response to job requirements and economic conditions instead of the employer trying to determine how much work is needed to complete a given task and overestimating.[citation needed]

Another aspect of uncertainty results from the firm's imperfect knowledge about worker ability. If a firm is unsure about a worker's ability, it pays a wage assuming that the worker's ability is the average of similar workers. This wage under compensates high-ability workers which may drive them away from the labour market as well as at the same time attracting low-ability workers. Such a phenomenon, called adverse selection, can sometimes lead to market collapse.

One way to combat adverse selection, firms will try to use signalling, pioneered by Michael Spence, whereby employers could use various characteristics of applicants differentiate between high-ability or low-ability workers. One common signal used is education, whereby employers assume that high-ability workers will have higher levels of education. Employers can then compensate high-ability workers with higher wages. However, signalling does not always work, and it may appear to an external observer that education has raised the marginal product of labour, without this necessarily being true.

Discrimination and Inequality
Inequality and discrimination in the workplace can have many affects on workers.

In the context of labour economics, inequality is usually referring the to unequal distribution of earning between households. Inequality is commonly measured by economists using the Gini coefficient. This coefficient does not have a concrete meaning, but is more used as a way to compare inequality across regions. The higher the Gini coefficient is calculated to be the larger inequality exists in a region. Over time, inequality has, on average, been increasing. This is due to numerous factors including labour supply and demand shifts as well as institutional changes in the labour market. On the shifts in labour supply and demand, factors include demand for skilled workers going up more than the supply of skilled workers and relative to unskilled workers as well as technological changes that increase productivity; all of these things cause wages to go up for skilled labor while unskilled worker wages stay the same or decline. As for the institutional changes, a decrease in union power and a declining real minimum wage, which both reduce unskilled workers wages, and tax cuts for the wealthy all increase the inequality gap between groups of earners.

As for discrimination, it is the difference in pay that can be attributed to the demographic differences between people, such as gender, race, ethnicity, religion, sexual orientation, etc, even though these factors do not affect the productivity of the worker. Many regions and countries have enacted government policies to combat discrimination, including discrimination in the workplace. Discrimination can be modeled and measured in numerous ways. The oaxaca decomposition is a common method used to calculate the amount of discrimination that exists when wages differ between groups of people. This decomposition aims to calculate the difference in wages that occurs because of differences in skills versus the returns to those skills. A way of modeling discrimination in the workplace when dealing with wages are Gary Becker's taste models. Using taste models, employer discrimination can be thought of as the employer not hiring the minority worker because their perceived cost of hiring that worker is higher than that of the cost of hiring a non-minority worker, which causes less hiring of the minority. Another taste model is for employee discrimination, which does not cause a decline in the hiring of minorities, but instead causes a more segregated workforce because the prejudiced worker feels that they should be paid more to work next to the worker they are prejudiced against or that they are not paid an equal amount as the worker they are prejudiced against. One more taste model involves customer discrimination, whereby the employers themselves are not prejudiced but believe that their customers might be, so therefore the employer is less likely to hire the minority worker if they are going to interact with customers that are prejudiced. There are many other taste models other than these that Gary Becker has made to explain discrimination that causes differences in hiring in wages in the labour market.